California high court: 200+ percent interest loans ‘unconscionable’

The California Supreme Court on Monday ruled that rates on loans for $2,500 or more can be so oppressive — or “unconscionable” — that they violate the law.

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California law strictly limits interest rates on loans of less than $2,500, and sets no numerical ceiling on interest for higher loans. But the state Supreme Court says rates on loans for $2,500 or more can nevertheless be so oppressive — or “unconscionable” — that they violate the law.

In a class-action suit filed in San Francisco against the prolific lending company CashCall, the court ruled unanimously Monday that state regulators, or judges, could intervene whenever interest rates are “unreasonably and unexpectedly harsh.” The court did not offer a numerical formula, and said enforcement should start with the state Department of Business Oversight, formerly known as the Department of Corporations.

CashCall, based in Orange County, specializes in consumer loans to high-risk borrowers. From 2006 to 2011, the period covered by the suit, the company offered unsecured $2,600 loans, payable over 42 months, with interest rates of 96 percent, later increased to 135 percent.

The company now charges 210 percent interest for those loans, with interest amounting to four times the amount of the loan or more, said James Sturdevant, lawyer for the borrowers who filed the suit. Its advertising slogan is “Make the CashCall.”

CashCall defended itself by citing the 1985 state law that set maximum interest rates for lenders: 2.5 percent per month for loans of up to $225, declining amounts for larger loans, and 1 percent per month for loans between $1,650 and $2,499. The company argued, and a federal magistrate agreed, that loans of $2,500 or more were not regulated by California law.

But the state’s high court, asked by a federal appeal court for an interpretation of state law, said the 1985 statute explicitly banned loans of any amount that were found to be “unconscionable.”

Under a law that is meant to protect consumers, “courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms,” Justice Mariano-Florentino Cuéllar said in the 7-0 ruling.

He said courts must proceed cautiously, considering not merely the terms of the loan but also how it was negotiated as well as its “commercial setting, purpose and effect.” Unsecured loans to high-risk borrowers “often justify high rates,” Cuéllar said, and past crackdowns on “payday loans” have not always worked to protect consumers.

But if a loan or group of loans is found to be oppressive, Cuéllar said, courts can roll back the interest rates and order the lenders to compensate the borrowers.

Sturdevant, the plaintiffs’ lawyer, said the ruling would apply to “millions of loans in California,” including 135,000 in the suit against CashCall.

“These are people who can’t borrow money any other way,” he said. “They think they’re going to get a job, or they have a job and they get laid off.”

State regulators have failed to act against the lenders, Sturdevant said. Attorney General Xavier Becerra’s office, however, filed arguments supporting the plaintiffs.

Bob Egelko has been a reporter since June 1970. He spent 30 years with the Associated Press, covering news, politics and occasionally sports in Los Angeles, San Diego and Sacramento, and legal affairs in San Francisco from 1984 onward. He worked for the San Francisco Examiner for five months in 2000, then joined The Chronicle in November 2000.

His beat includes state and federal courts in California, the Supreme Court and the State Bar. He has a law degree from McGeorge School of Law in Sacramento and is a member of the bar. Coverage has included the passage of Proposition 13 in 1978, the appointment of Rose Bird to the state Supreme Court and her removal by the voters, the death penalty in California and the battles over gay rights and same-sex marriage.